Acquiring a business can be a complex, resource intensive and time consuming process, yet attaining the right business can generate substantial value. We have highlighted some key issues that should be taken into account when acquiring an energy and mining company. In the final of our three part series, we consider points 11 to 15:
As an acquirer you want to gain comfort that you are acquiring what you expect. High quality financial, technical, commercial and legal due diligence will uncover key issues that could make or break the sale and be key to negotiating a lower price. It is also important to engage a qualified and reputable firm of geological experts to carry out a technical evaluation of the target’s assets in the form of a Competent Persons Report. If the acquirer is in the UK, they will most likely require a JORC compliant report completed by an internationally recognised firm. However, in other parts of the world, including China or Indonesia, for example, a technical evaluation report produced by a locally recognised firm might be acceptable. It is important your advisers are highly responsive, and can react quickly to changing situations.
Tax status of energy and mining owning company
The tax status of the target will need to be ascertained, including where the assets owning company will be resident for tax purposes? Is it also liable to tax in the country where the asset is located? What rates of tax apply and what reliefs are available for capital expenditure in the relevant jurisdictions? What is the withholding tax position if the company pays interest and/or dividends? Might the tax status of the target company change once it is acquired, for example if there is a change in the location of management and control, and if so what are the implications?
Tax status of the group after acquisition
If there is a holding company which owns the target asset owning company, where is it located for tax purposes? Will this change? How are dividends and other amounts received from the owning company taxed? What are the taxation implications if the business is being acquired by a new holding company, and where should the new holding company be located?
Withholding tax on interest
When arranging finance to acquire the business, it is important to consider whether the payment of interest will give rise to any withholding tax liabilities. For example, if a UK resident company pays interest other than to a UK bank or UK branch of an overseas bank, a withholding tax liability will arise equal to 20% of the interest payments made unless there is relief under a suitable double tax treaty, or an exemption applies for example the financing is a eurobond. Whether or not treaty relief is available will depend on the beneficial owner of the interest receivable. If treaty relief is available advance clearance should be obtained before any payments are made. Many other jurisdictions have withholding tax obligations in respect of interest payments.
Exemption from UK tax for foreign branches
If the energy and mining business is a UK resident company with an overseas permanent establishment or branch in the country where the assert is located, it may be possible to make an election to exempt the profits of the branch from UK tax. The exemption will apply to profits regarded as attributable to the branch, although profits derived from investment business are excluded. The exemption does not apply to profits which are regarded as having been 'diverted' from the UK.
If you think the issues highlighted here, or in Part 1
or Part 2,
are likely to impact your acquisition or would like any further information, please get in contact to discuss how we can help.
Energy, mining & renewables